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The SEC's Crowdfunding Rule Could Change Everything

Step aside venture capitalists. A new SEC rule would give the public the power to fund new businesses.

Crowdfunding has officially hit the big time. Borrowing the model from Kickstarter and other crowdsourcing sites, the SEC is looking to approve a rule that allows for regular people to invest in small start-ups through crowdfunding "portals."

Source: Social ROI

Should the proposal pass, the crowdfunding measure would be incorporated into the Jumpstart Our Business Startups (JOBS) Act, which was passed in 2012 and relaxed regulations to allow for quicker and easier growth for small businesses.

Previously, companies could only seek investments from accredited investors who have a net worth of $1 million or more or an annual income of $200,000 or more. This forces most small start-ups to seek out venture capital. If that doesn't pan out, they get a loan, which can be very risky.

This new rule would make it so small businesses could actively raise funds -- up to $1 million each year -- from unaccredited investors. Regular people could invest in start-ups they believe in and the companies wouldn't have to register the securities with the SEC.

There would still be regulation through crowdfunding portals, but the specifics as to how they will operate is still hazy. At the moment, all that's really known is these portals would need to provide information to the investors to reduce fraud risk and they'd require companies to disclose information about their directors, how the money will be utilized, and other relevant financial info.

Source: Queen's University

Should this model succeed, start-ups that get off the ground will be largely determined by the public. It would be a democratization of business creation. Businesses would be providing products or services by the people and for the people. How American is that?

Setting the legal specs aside, it's important to note just how revolutionary such a ruling would be. While some are focusing on the potential risk of fraud, the bigger picture is one that includes the diminishing role of business gatekeepers; of a VC structure that values the "it takes money to make money" paradigm.

Plus, this type of social capitalism allows a wider spectrum of people to vote with their wallets. If an idea is deemed worthy, a large group of people back it. Even if they're only investing a few hundred dollars, they're still saying, "Hey, this deserves a chance."

And beyond getting a shot at building a business from the ground up, crowdfunded start-ups also get the benefit of an engaged beta customer base. These were people willing to open their wallets to invest in a company before it had anything to offer. And much like with creative crowdsourcing sites like Kickstarter and IndieGoGo, those initial "backers" act as a ground floor marketing team. They'll get the word out about a business because they actually have a stake in the company's success. Word-of-mouth promotion, both in person and across social media, are powerful tools. When leveraged as a foundational component of a start-up? The sky's the limit.